Category: lenS & thoughtS

No risk is risky. When enough is enough.

I have experienced this – 9% “interest rate” can be risky.

Not to say you can’t do it but be aware of the risk.

When everyone thinks China’s property price can only go up, that’s risky.

It’s hard to call what’s the fair price – most of the time it can be “unfair” for some time and be well above what you think is fair.

Incorrect understanding of risk leads to irresponsible leverage, which might result in an “unfair” pullback.

Collectively, behaviors reinforce each other and the systematic risk is accumulated.

We have seen it in the US stock market, in the US housing market, in the Japan stock market, in the Japan housing market.

This the the first part – “No risk is risky”

The second part is harder.

When to call the reversal could be more art. How much more than “fair” is “fair”?

Nobody can tell you when enough is enough. You have to think independently and get to conclusion. It could be a very lonely journey. But if you make it right, congratulations, you earned yourself a great investor.

How to get to your conclusion? Get more unbiased info, be really reasonable and be patient. Just personal thinking, I am not good enough to give advice.

ROI on your time and short videos

Most people don’t have the concept of ROI on time, although time is the most valuable resource everybody possesses.

Sometimes you feel you are wasting your time. This is a sign of very low ROI of your time.

But nowadays, low ROI activities are concealing themselves with a very short time commitment so that many people are tricked into it.

Just like people don’t feel that bad to buy a small lottery ticket which likely has a negative return, people don’t feel that bad to waste 10 additional seconds.

When your marginal utility of watching one more short-video is low, this 10 additional seconds is a bad investments. What’s worse, you may keep doing this “bad” investments for some time, resulting in low ROI on 30 minutes of an hour.

Additionally, it’s very hard to measure the ROI on one more additional short-video. Someone could argue that the initial few ones are good, as they are likely the good ones based on other people’s feedback, or first few minutes of “taking a break” is good.

But that utility is decreasing gradually for every additional video you watch.

The incremental decline is too small for people to notice. 

The best way to counter the impact for me is to stop at the end of the video and think what you get from it, and what else you want to watch instead of just accepting what the app gives to you.

If you watched short videos today, just try to ask yourself before you go to bed – what do you remember? I bet there is not much valuable info.

Be aware of your ROI on your time before you open the app and when you are using it. Don’t let your habit guide you.

Printing money

There are several ways of printing money without actually printing, for example by IPO/issuing stocks.

If a company has 100 shares, you only need to price 10 share at $10 per share to create a market cap of $1,000.

That’s the essence of printing money – using only $100 to create a fortune of $1,000.

Several years ago, when ICO was popular, it applies the similarly concept – you only need to price a small amount of coins to have a “nominal” market cap that’s tens or hundreds times larger.

This is not finished though.

You need another step to turn paper wealth into actual money – borrow against it.

It’s pretty easy to borrow against a liquid stock. The lender can sell the stock into the market if needed to protect the loan. To minimize potential loan loss, lenders just need a discount – say to lend $60 given $100 stocks, in case of market volatility and liquidity discount. This ratio may change.

Lending against many coins is riskier as many coins don’t have the necessary liquidity market to withstand a large quantity of sale.

At this point, money is printed.

The concept can be applied to the real estate market.

When an apartment is sold to market with a price, the apartment building/complex gets a market cap, and the whole residential area gets a monetary value like market cap.

In this process, a buyer helps create “IPO”, not only for this developer, but also for the local government.

With the help of banking, money is printed with one home sale, just like a share transaction created the whole market cap.

With secondary transactions, a company’s stock gets a new price and the company gets a new market cap.

It’s the same thing for second-hand house transactions.

And you know what, just like share can be bought back by companies, homes can be repurchased.

This is what China is doing.

The question is, share buyback can be an indication of confidence and a source of liquidity. Does home repurchase program want to achieve both goals?

Shares within the same class are created equal, homes are not. How to execute is another question.

Two vs. Three

Two is much better Three in terms of market competition / dynamics.

Visa and Mastercard is are two giants in payment network.

WeChat and AliPay are two leading mobile payment providers in China.

Global PD-1 market has two leading drugs – Keytruda and Opdivo

Differentiated “two” is also good.

Android and iOS are two mobile operating systems with differentiated business models.

CATL and BYD are two leading Chinese battery makers with differentiated business models.

 

Three is a different picture.

US has three big automakers, Stellantis, GM, and Ford.

China has three SOE automakers, 一汽, 上汽 and 广汽. There were three private automakers, Great Wall, Geely and BYD. Three are three US-listed new energy vehicle startups, Nio, Li Auto and XPEV. [3 x 3…]

Three are three major airlines with alliances, Star Alliance (United), Oneworld (American), SkyTeam (Delta). There are three low-cost carriers (although nowadays the line is blurry) SouthWest, Alaska, and JetBlue. There are three ULCC, Allegiant, Frontier and Spirit. [3 x 3…]

China has three SOE airlines, 国航, 东航 and 南航. Each joined one of the three alliances.

 

One is rare.

Two is good; differentiated two is even better.

Three is hard; three times three is very hard.

 

Growing out of three is amazing.

BYD is an example.

Are China internet companies valuable from a US perspective?

Before getting into financials, some may ask the question of “why bother”?

My thoughts below:

 

1/ These companies are customers of other global companies. 

e.g. gaming companies or PDD shall purchase ads on Meta & Google

e.g. internet companies shall purchase general server chips like Intel, AMD.

 

2/ These companies serve a market that US firms are not directly serving

Debatable. But the current reality is that Chinese internet space is mostly Chinese companies.

 

3/ Sanctions?

I view it less likely than before. US and China are trying to stablize ties.

It’s hard to have direct monetary impacts as they mostly serve the domestic market. What to gain from more sanctions?

Some companies are very careful overseas and do comply with local laws, e.g. Tencent’s subsidiary Supercell did pull out of Russia market.

 

4/ Domestic regulations?

Less likely in the near-term. Most previous restrictions are no longer there. Didi back to app stores, some after-school education is back, draft on more game regulation is stopped.

Weak macro protects these companies. Less disruption is good.

 

Plus, they do have growth, have become leaner, and are not expensive.

Starbucks China positioning

Personal experience:

It was cool to hold a Starbucks drink in hand, but less so in recent years.

The cool factor is diluted with %Arabica (82 stores), Blue Bottle (5 stores), and Peet’s (over 200 stores).

Blue Bottle can drive me to a shopping mall that wasn’t on my plan. Starbucks has less effect these days.

I rarely buy Luckin coffee, unless it’s a hit product like Moutai coffee. Mostm Luckin items don’t taste like coffee but more like sugar drinks to me.

I have tried other domestic brands like M Stand (350 stores). I think that tastes more on par with Starbucks.

Manner (1000 stores) is not on par with Starbucks, but the minimalist style looks appealing than Luckin for certain customers.

Other international brands like Tim’s (912 stores) is not a bad choice. But the store is less sophisticated than Starbucks (lack of charging).

In terms of drinks, I think Starbucks is less differentiated among premium brands like %arabica, Blue Bottle, Peet’s.

In terms of services, Starbucks is differentiated with charging outlets. And I like the option of ordering without a phone, although I mostly order on phone.

In terms of branding, it’s less “cool” compared with %Arabica and Blue Bottle, unless it’s a Starbucks Reserve coffee.

I think Starbucks’ problem in China is more of a positioning problem. How it can target different segments with a single brand? Different customers want different things and they are just too different in China.

  • too mainstream to be premium / high-end
  • too expensive for routine customers in the real mass market (incl. lower tier cities) in the long run

I am sure in some cities, Starbucks shall still enjoy a “cool” factor for some time, but can fade over the years if other foreign brands enter.

%Arabica Shanghai

 

Blue Bottle Shanghai

Is Chipotle a robot company that happens to make chipotle?

Not to say these systems are fantastic; but at least you need to experiment first. Investors love stories.

Robots could do fries Chippy robot (by Miso Robotics)

Robots could peel and cut avocados Autocado (by Vebu)

Robots could prepare the bowl/salad (by Hyphen)

 

Problems?

  • cleaning
  • items prepared may not be as good as humans for now
  • lack of customer relationship (I still like it when your local coffee shop people can remember your name)
  • if broke down, hard to replace? unless you have a spare machine nearby… but in every city?
  • less job growth for society
  • etc.

How to win young voters?

Mortgage rate 7% is too high.

If you didn’t purchase a home in 2020-21, you seem to have missed the boat.

Sure unemployment rate is low, but young people don’t have that feeling that job market is great. The confidence of easily getting another job, or getting a good raise is not high.

Sure crypto price may ease some pressure if you assume that’s young people’s assets, but that’s too speculative to put a lot of money, and may not be good for the hardworking people with low risk-appetite.

Student debt relief seems to be a limited approach.

Pro-Palestinian protests and the subsequent arrests could be troubling.

It’s either lowering rates soon or legalizing marijuana soon, to win young voters.

But marijuana is a risky approach and might have negative impact on other voters. Must be cautiously executed.

Single biggest investment decision in the last 3 years

To me, that’s “not buying a home in Shenzhen”.

How much did I gain? almost as much as $1mn.

Well, if I bought a 10-20mn rmb home in 2021, with 30-50% down payment, which was the plan, I would have invested 3-10mn rmb.

Over the past 3 years, I could have lost 3-6mn rmb or 60-100% of the equity value, assuming home prices dropped by 30%. In fact, I have seen examples of home price dropped by 66% in 2024 compared with 2021.

This doesn’t include the interest expenses, brokerage fees, and opportunity costs which can be at 2.5% deposit rate times 3 years for rmb.

What surprised me in 2021?

The low rental yield surprised me at first – easily 1%.

The place I got in 2021 shall cost 10mn rmb to purchase, but renting costs 11k rmb / month, which was 1.3% rental yield.

Then I realized housing price in SZ is comparable to some of the most expensive cities in the world. (ASP in certain part of SZ can be easily 150k+ rmb per sqm, which is equivalent to $2.1k  / sqft)

$2k / sqft is insane.

Even someone assumes (subtract) the savings on insurance, tax, etc., (say 2-3% a year) – the price is high ($1k / sqft).

The simplified math works like this – take a $1mn home as an example, assuming a 2.5% discount rate, and assuming the cost of owning is 2.5% per year, the savings on cost of owning is $1mn.

Therefore, you could cut the China’s listing price by half and compare. But still expensive. This also assumes that you don’t pay property tax in China – which is true is most cities and especially for your first home or smaller homes.

Note that if US raises interest rate, that value of this “saving” can be immediately cut – e.g. cut by 50% if discount rate increases to 5%. See below.

Home price to income level is also concerning. I am sure there are many rich business owners in SZ, but wages are not that high. High-paying jobs are not common, and SZ was not as resilient as other cities in earning wages.

Big companies like Tencent, Vanke shall face pressure in the coming years. [Gaming was called spiritual opium in 2021, and Vanke is a residential real estate developer] Cross-border e-commerce was hot, but competition quickly rose (especially from TEMU), plus global consumption dropped as Ukraine war broke out and Fed increased interest rate.

SZ also have strict requirement to purchase homes. You need to have 3 years of social insurance payment to purchase a “residential property”. You could purchase an “apartment”, which doesn’t need social insurance requirement but that can drop even more in prices due to oversupply.

[“residential property” and “apartment” are two different types of property that are treated differently in property rights, in taxes, in education resources, in electricity costs, etc.; rental price could be the similar, but “residential property” are more expensive to purchase]

The Great Rebalance

It has been 4 years since Covid-19.

From q2 2020 to q1 2022, China attracted export orders as many parts of the world was shut down. US lowered the interested rate and asset prices surged.

Then a few things happened: the war in Ukraine, the interest rate hikes, and the Shanghai lockdown among rolling lockdown in different parts of China.

From q2 2022 to q1 2024, US has attracted capital with high rates and developments in AI. US started to introduce more targeted policies in maintaining tech leadership (namely AI), from foundry subsidiaries and chip restrictions. China would get rid of lockdowns but started an even more difficult fight with property sector problems.

As of now, after the eventful four years, many things have rebalanced to a point that I think many have achieved their agenda.

US regained global leadership, via global defense partnerships in Ukraine and middle-east, and via LLMs, monopoly in the most advanced chips, and computing power. US has diversified supply chains and TSMC has plans to build 3nm or below to the US.

China recalibrated its growth model and has de-risked this property bubble. China has built out its own chip capabilities although very limited and maybe only up to 7nm (Huawei restarted smartphone business again in China). China now views itself with fewer chock points than before.

Policymakers should be happy? They seem to have gained tremendous power. In first 2 years, they seem to be reacting / pushed to do things, while in the second 2 years, they were definitely more active in setting the tone.

Regular people lost some confidence/freedom in the last two years, after the first two years of gaining lots of bargain power